Deutsche Bank meets limit of financial engineering

Commentary: Top German bank lags its global rivals

SAN FRANCISCO (MarketWatch) — When it comes to cars, electronics and any sort of mechanical contraption, the Germans have a reputation for engineering.

Reuters

A figure representing Chancellor Angela Merkel with the slogan “moneygrubbing” is pictured during a 2011 protest against banks in front of a branch of a Deutsche Bank site in Cologne.

Financial engineering? A reputation, yes. There, too. But not of the sort that will win over investors.

Deutsche Bank AG
DBK, -0.29%
posted a stunning $2.94 billion loss on Thursday. The loss was due, in part, to excessive leverage at the bank. Deutsche Bank is writing down the value of assets on its books, and, as the market is finding out, the process is painful.

Leverage — the ability to turn, say, $1 in the bank into $10 in investments — has long been the tool of global banks. When used to extremes, disaster is just a matter of time. As former bond trader Chris Arnade, writing for the Scientific American, noted, overleverage was the primary cause of the financial crisis.

“With balance sheets engorged relative to capital, prices did not have to fall far before some institutions faced insolvency,” Arnade writes. “Cross borrowing amongst institutions led to further entanglements. No fund was an island.” See full blog post at ScientificAmerican.com.

The fallout may have taken time to reach Frankfurt for a couple of reasons. First, Deutsche Bank did not require a bailout from the German government. Second, it probably didn’t need that bailout, in part because it didn’t recognize losses in it its portfolio.

Former bank officials have told investigators that Deutsche Bank hid between $4 billion and $12 billion in losses from the public. That hardly compares to the write-downs at Citigroup Inc.
C, +0.14%
and Bank of America Corp.
BAC, +0.20%
which took close to a $90 billion hit.

The problem for Deutsche Bank is timing. While many global banking rivals continue the sluggish progress of shedding toxic assets and write-downs, Deutsche Bank is facing the music now.

Engineering can cover a lot of flaws, but its benefits have limitations once the car has hit the ditch.

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